Unintended Consequences

For the last two weeks, the unintended consequences of two central banks' policy measures are starting to raise concern. One far away in the US, which remains an uneasy waiting game and one closer to home, which became effective this month.

Stronger than expected US employment numbers, surprised the market and strengthened the view that the Fed could bring forward its plan to raise US interest rates from the October consensus. As a result, the focus on containing inflation in the US, unintentionally, led to a massive shift of funds into US dollars, strengthening the US dollar and weakening other global currencies, including the rupiah. With major factory inputs and some food items still imported, a weaker currency puts pressure on domestic inflation and makes it more difficult for governments to stimulate its economy by lowering its interest rate. So inflation is contained in the US, but imported inflation, in varying degrees, raises concern in other countries.

June 16, 2015